I think a recent article and a recent video from BoomBustBlog are worth your time. First, about a week ago an article titled ‘Reggie Middleton on Inflation‘ appeared on that Blog – reading time 5 minutes. Shortly thereafter an article – reading time 1 minute – with an accompanying video (viewing time 9 minutes) titled ‘Inflation + Deflation = Stagflation – Lower Real Estate Values!‘ appeared on the same Blog. The first article says – much like I discussed in a recent e-mail – that in the U.S. it is apparent that some interest rates (mortgage rates, 10 year Treasuries) and energy prices are going up, while at the same time consumer affordability of major consumer goods (read ‘houses’) is going down. Here is my simplistic summary of what has happened, and is currently happening, in the U.S.
· U.S. unemployment is very high, and higher yet again when those who have given up looking for jobs are factored in;
· the Main Street U.S. consumer is ‘out of spending gas’. Concurrently, immediate disposable (food, gasoline) are increasing in price at rates beyond reported the CPI reported inflation rate;
· average U.S. house prices are at best holding their own, and are dropping in some geographic areas;
· the prices of commodities (oil, copper etc. WTI Oil is over U.S.$113 per barrel this morning as I write this) broadly are up, which means that at the input costs for houses, cars, refrigerators, and other big ticket consumable goods is increasing;
· as inflation in China (read wage increases, overbuilt housing) continues to heat up, even where the Chinese Renminbi (Yuan) appreciates further against the U.S.$ it is likely that prices paid by U.S. consumers for goods made in China will increase and thus be inflationary to those U.S. consumers. The tables will have turned, and China will be exporting inflation back to the U.S.;
· QE2 will end, with the largest benefactor in all the U.S. Government subsidization schemes having been the U.S. banking system, not the U.S. consumer or U.S. economy broadly;
· the Republicans will fight ‘tooth and nail’ on both the upcoming Debt Ceiling Increase debate, and on the September, 2012 fiscal year budget – likely trying to negotiate trade-offs between the two in an attempt to significantly lower the next year’s U.S. Federal deficit; and,
· the Fed will be hard-pressed to raise interest rates, as to do so will almost certainly slow the U.S. economy further. In the end, with the Republicans ‘clawing and biting’, I think QE3 is very likely.
Of course, ultimately the U.S. (and every other over-levered country) will have to ‘pay the piper’ and suffer from its past extravagances. In the meantime, I think the U.S. is more likely headed toward Stagflation than toward Hyperinflation. I don’t think Fed Chairman Bernanke is correct in thinking that the current inflation attaching to food, oil and other consumables is a ‘temporary phenomena’. I also don’t think that the same ‘inflation’ that is likely to carry the costs of those consumables higher is going to be reflected in higher housing prices and higher ‘major ticket items’ at the retail level. This is because the U.S. consumer has a finite amount to spend, and has to eat and pay for basic services, gasoline, clothes, etc. before they buy a ‘high ticket items’ such as houses, cars, or refrigerators. As I see things, this means the U.S. Main Street consumer won’t be able to afford to pay higher prices for high-priced durable goods, and lack of demand may force the price of these things downward. If this occurs, it in turn likely would reduce retail and manufacturing margins, which likely would result in more U.S. unemployment, reduced U.S. government tax revenues, increased U.S. Federal deficits, etc. – in other words, an environment would exist where non-durable goods inflation and durable goods deflation would occur concurrently. As I understand things this would constitute a ‘stagflation environment’, not an attractive prospect. For reference, ‘stagflation’ can be broadly is defined as: ‘a period when the inflation rate is high, and the economic growth rate is low’ or, alternately, ‘a period when an economy is stagnant while inflation is rising’.
One bright note: I suspect it will be a good thing to own residential high-rise apartment buildings, buildings those who have lost and subsequently lose their houses will migrate to. Everyone needs a roof over their head, and apartment rents may be ‘bid up’ as the U.S. economy moves forward.
I wrote about stagflation in an e-mail about ten days ago. Two Subscribers (both who I know, and whose views I respect) wrote to me and told me I was wrong. Essentially both said ‘inflation is inflation’, and that is what the U.S. was going to experience going forward. I urge you to read and watch the Middleton article and video, and then comment on my Stagflation conclusion either by clicking the following link – or by writing to me at info@stockresearchportal.com.
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